The conwert Group has implemented a comprehensive risk management system in line with international standards. This system is subject to regular evaluations and improvements by internal and external bodies to ensure that it is fit for purpose and that it meets internal quality requirements and legal stipulations.
The risk management system which is in place across the entire conwert Group is defined as a framework and consists of the following components that build on one another:
The risk strategy involves the basic formulation of understanding risks, as well as defining the scope and purpose of the risk management system and the clear differentiation between risk management and other functions and activities related to achieving the economic goals of the conwert Group. As with the overall strategy of the conwert Group, the risk strategy is regularly adjusted to reflect changes in frame conditions. The conwert Group risk strategy specifies that no incalculable risks are undertaken and that calculable risks are managed through appropriate measures in such a way that there is no threat to the company’s status as a going concern should such a risk occur.
Risk identification defines risk areas, identifying individual risks as such and determining areas which require observation in which risks must also be identified. Risk identification includes identifying short-term changes to the risk environment and new risks. Risk identification is a permanent, ongoing process which is conducted in every Group division.
In risk assessment the nominal potential risk (impact) of individual risks is determined along with the likelihood of occurrence. The nominal potential risk represents a value which would have a significant negative impact on the planned financial results for the period. Risk correlation is taken into account in as far as it can be determined. Aggregating individual nominal assessed risks results in a cumulative risk item which is reduced to a net risk item through risk management measures.
Risk management includes preventative and reactive measures including ad hoc measures, which are implemented when new risks suddenly occur.
Risk communication specifies the structured collection, presentation and disclosure of any relevant information in the form of a risk report made by the responsible party (risk owner) to the Group management.
The measures defined in the risk management process are subject to ongoing monitoring. The fitness for purpose of the Risk
Management
Risk strategy Risk identification Risk assessment
30 Annual Financial Repoprt 2013 | Management Report | Risk Report
Functional risk management appropriate to the structure of the Group is conducted centrally by managers (risk owners) in the Group management and administration as well as at a local level by regional managers in Germany, Austria and the other countries. The risk owners attend a regular meeting of the Risk Management Board (held quarterly), at which they address the significant risks which have been identified and carry out monitoring based on the defined competency of the risk owner. The administration and coordination of risk management as a whole is carried out by the Group division “Controlling, Risk Management and ICS”, which is under the remit of the CFO. The Executive Board as a whole is responsible for risk management and reports to the Administrative Board on a regular basis.
Categories of risk
Six risk categories have been defined within risk identification: “Strategy”, “Organisation and IT”, “Market”, “Economic and political environment”, “Operations”, and “Finance”. These cover all of the sources and levels of risk which are relevant to the conwert Group. Individual risks have been identified in each risk category and recorded in a risk catalogue. Together with the Group guidelines on risk management, the risk catalogue serves as a foundation for fulfilling the risk owner function. The following significant risks in particular are managed on the basis of the six risk categories:
Strategy
Every risk which may result from the development and implementation of Group strategy, forming and managing strategic partnerships and shareholdings, including the shareholder structure and Articles of Association, falls under the “Strategy” risk category. The Executive Board is the risk owner for the “Strategy” risk category and the Chairman of the Administrative Board also has direct responsibility.
In order to minimise risks in this category, the conwert Group undertakes ongoing market observation and monitoring of Group divisions using forecasts, continuous benchmarking and a proactive investor and public relations policy. Furthermore, investment guidelines have been specified in the course of defining the conwert Group’s investment strategy; these specify economic parameters in terms of regions and sectors. All investment is subject to an internal approval process appropriate to the level of the investment. Nevertheless, the possibility that the conwert Group’s status as a going concern is indirectly threatened due to ongoing negative developments in the economy as a whole cannot be ruled out.
Key strategic risks
Description of risk Impact Countermeasures
General corporate risk + Corporate growth not
progressing as planned
+ Declining profitability + Loss of efficiency
+ Staff fail to identify with company
+ Ongoing monitoring of corporate divisions and budget
+ Ongoing monitoring of internal processes General economic risk
+ Economic crises and market cycles negatively impact property market
+ Property market slump + Decline in business
+ Diversified property portfolio + High level of stability for prices for
high-value properties in top locations + Focusing business activities on
markets with secure growth Controlling, risk management and ICS Central management functions Regional management Risk Management Board
Executive Board Administrative Board
Organisation and IT
The “Organisation and IT” risk category covers all potential risk scenarios which may occur in the course of management activities including recruitment, salaries, HR management and any risks arising from organisational issues and anything related to information technology. The individual risks in this category have been assigned to the respective risk owners in the central divisions. In cases where there is a direct link to operational areas at regional level, the risk is simultaneously managed by the regional manager as an additional risk owner. Procedural repetition and loss of efficiency is reduced by the appropriate coordination and organisation of central and regional activities, without losing sight of correctness aspects.
As the entire IT division is of particular importance from a risk policy viewpoint, the existing IT strategy has been developed in such a way that no restrictions on the conwert Group’s operational activities are expected in the future. However, situations may occur – especially through unforeseeable criminal attacks – which negatively impact the functioning of the IT infrastructure in a way that may be detrimental to the Group.
Market
The “Market” risk category applies to risks resulting from developments in the markets in which the conwert Group operates. This also includes risks which may result from client relations or from the competitive backdrop. Ongoing observation of the competition is conducted by the nominated risk owner in the operational sector at regional level, along with analysis of changes in demand on the various markets. Through diversification of market services by the conwert Group, which is represented in multiple markets which vary in terms of region and activities, at present there are no individual risks or risk clusters which directly threaten the company as a going concern. Should significant, long-lasting and negative changes occur on the market in the future, these could nevertheless have a significant impact on the Group’s equity.
Economic and political environment
Risks related to the economic and political environment have been assigned to the central Investor Relations division and the respective regional managers, who are classified as risk owners. This risk category primarily contains risks arising from changes to the legal framework and macroeconomic developments. Should this type of risk occur, access to capital and liquidity for conwert or its clients or suppliers could be impaired to such an extent that further participation on the market would be disadvantageous or even completely unviable. These risks could result from changes in subsidies or fiscal policy related to building, purchasing or selling property, or from rises in inflation or negative developments on the capital markets, which are directly or indirectly influenced by overriding political interests. At present the conwert Group has a balanced financing structure with broad diversification and is striving for constant improvement in the equity ratio. If borrowed capital or equity were to become dramatically more expensive, this could have a significant negative impact on conwert.
Operations
Operating risks include all risks which result directly or indirectly from conwert’s business activities. On its core markets the conwert Group primarily operates in the sectors of letting, sales and property services. As risk owners, the regional managers handle every identified risk from the aforementioned business areas. The risks result from the respective service provision processes and are minimised through appropriate, process-integrated, preventative measures and controls in such a way that, from today’s perspective, no threat to the company as a going concern can arise. However, this cannot be completed ruled out as this risk category also includes events which are beyond the company’s control and which cannot be fully covered by insurance. These include acts of God or unconventional criminal activity occurring on a significant scale for a longer time period.
32 Annual Financial Repoprt 2013 | Management Report | Risk Report Finance
Finance risks include all direct and indirect risks which have a significant impact on liquidity and solvency and there- fore on conwert as a going concern. They comprise maintaining revenue, securing cash and cash equivalents and hedging interest rates on borrowings. The category also includes risks related to timely and correct reporting to authorities and investors.
The conwert Group manages its liquidity requirements on the basis of constantly updated liquidity plans, which reflect probable and foreseeable cash inflows and outflows. Despite this, the occurrence of liquidity shortfalls cannot be ruled out. To ensure timely reporting to authorities and investors, the reporting systems and their operational security along with the processes and methods used are subject to ongoing monitoring, with improvements made wherever necessary. If a complete longer-term breakdown of the system were to occur, delays which prevent timely reporting cannot be ruled out.
Description of risk Impact Countermeasures
Property valuations + Fluctuating property prices
through changes to the economic backdrop
+ Divergence from results reported in financial statements
+ Effect on credit rating
+ Appraisals by independent experts + Increasing business activities
in secure growth markets Property sales
+ Slump in demand for residential and commercial property
+ Fluctuation of earnings from trading business
+ Ongoing market analyses + Rapid reaction to market
conditions and trends
+ Value-add strategy to maximise potential value of properties Letting
+ Decline in apartment letting and/or tenants fail to pay
+ Cost of vacancies
+ Shortfall in rental income through tenants with low credit ratings or falling market prices
+ Proactive asset management to reduce vacancy rates + Credit checks
+ Strong diversification of property portfolio
+ Adjusting rents to market levels + Value-add strategy so
properties appreciate Development
+ Fluctuating investment costs for development projects
+ Cost overruns in project development
+ Spreading cost-related risks (suppliers, service providers etc.) + Agreement of penalties
+ Ongoing monitoring of budget and construction progress Key property-related risks
Description of risk Impact Countermeasures
Capital market
+ Stock market volatility/crash + Financial crises
+ More difficult to secure equity + Lower liquidity
+ Limited opportunities for expansion
+ Broad long-term spread of borrowings + Improving internal financing capability + Ongoing liquidity planning
and management + Expanding liquidity base Interest rate risks
+ Rising interest rates + Increase in financing costs + Reduction in liquidity
+ Hedging interest rates (81.1% of financial liabilities are hedged) + Ongoing risk evaluation of
unhedged borrowing
+ Broad long-term spread of borrowings Credit risks
+ Restrictive lending policy by banks + Increase in financing costs + Reduction in liquidity
+ Improving internal financing capability + Broad long-term spread of borrowings
(average term of 8.7 years with 59 financing partners)
Foreign exchange risks
+ Volatility in foreign exchange rates + Reduction in liquidity + conwert operates almost exclusively in the eurozone (97.7% of property assets) + conwert has practically no
foreign currency liabilities Financial instrument risks
+ Negative impact from revaluation + Inefficient hedging of borrowings
+ Reduction in equity
+ Valuation of inefficient hedges has negative impact on financial results
+ Umbrella hedges in holding company allow flexible recognition
of borrowings at SPV level
+ Average interest rate of hedges is 3.93% Key financing and foreign exchange risks
34 Annual Financial Repoprt 2013 | Management Report | Internal Control and Rist Management System / Organisation and Corporate Structure